20 February 2012 00:00 [Source: ICB]
The outlook for Group II and III base oils demand in Asia is strong for the coming years, driven mainly by the increased availability of such premium base oils in the region and the Middle East, as well as higher fuel economy and emission standards. Asian blenders are likely to shift towards Group II and III supply and cut down on the use of Group I base oils to optimize their supply-chain costs as better quality basestocks become available in the region.
Growth in Group III supply will be particularly strong. More than 2.5m tonnes/year of Group III base oils capacity will be added by 2014 in Asia and the Middle East. Two projects in Qatar (Qatar Petroleum and Shell's Pearl gas-to-liquids facility), and Bahrain (Neste Oil, Bahrain Petroleum Co and nogaholding) started up in the second half of last year. A number of Group I plants in China are also slated to be upgraded to produce higher quality Group II base oils by 2016.
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China's growing car ownership is driving up base oil demand and quality in Asia
Milind Phadke, industry manager at US consultancy Kline & Company, says these expansion projects will be well positioned to meet Asia's growing demand. "The supply itself will be huge when all the planned projects come on stream. The logistics advantage for using these high-performance basestocks from the Middle East and Asia over Group I base oils that come from Europe, will result in the market moving away from Group I," he adds.
Phadke also notes that in the past, blenders focused more on technical requirements and limited the use of Group II and III base oils to selected applications that needed such high-performance basestocks because of their high prices. "Now they think of optimizing the overall supply chain cost. This means stocking a few universal, high-performance grades which can be used widely. This will result in their usage in applications that don't need them."
Such a move will raise the cost of individual formulations but will help blenders save on storage and inventory costs by carrying fewer grades of base oils. In the near term, however, the global base oil market is likely to experience an oversupply of high-performance basestocks when all the new Group III capacity comes on stream, he warns. "Technical demand creation will be slow and a significant portion of the supply will be absorbed in a marketing or substitution push," he says.
Eventually, technical demand will start to show rapid growth as the increased availability of higher quality oils will encourage the automotive original equipment manufacturers (OEMs) to recommend more fuel-efficient, lower viscosity engine oil, he explains. For passenger cars, the major OEMs in Japan, Europe and North America have already moved towards grades such as 5W30/5W20 and 0W20, while other Asian OEMs will increasingly follow suit. The Japanese automotive makers are also seeking to modify the SAE J300 to allow them to go lower than 0W20.
Group III base oils, with their high viscosity index and low volatility, are integral to the formulation of such engine oils that can meet the rising demand for reduced emissions and increased energy efficiency. A similar trend towards lower viscosity grades are also happening in the heavy duty motor oil (HDMO) and automotive transmission fluid segments, says Phadke. Group II and III base oils, he notes, will enjoy growth with HDMO transitioning to 15W40 from monogrades in Asia, and to 5W30 and lower in the eurozone and North America.
Demand for Group II base oils in key market China benefited from increased domestic supply last year, as assessed by C1 Energy, an ICIS service in China, in its 2011-2012 report on the Chinese base oil and lubricant markets. China's Group II base oil consumption in 2011 soared by nearly 55% from the previous year to account for 24% of total demand, as more competitively priced domestic supply became available following the start-up of two new facilities, the report said.
State-owned China National Offshore Oil Corp (CNOOC) and independent refiner Hainan Handi Yangguang Petrochemical added a total of 700,000 tonnes/year of Group II supply. Group II base oils demand is expected to continue to gain at the expense of the Group I segment in the next few years, as lubricant blenders seek to produce engine oils that can meet higher emission standards, the report said.
State refiners Sinopec and PetroChina will upgrade several Group I facilities to meet the increase in demand for higher quality oils, it added. Sinopec is expected to complete revamping three units by the end of 2012 and a fourth facility before 2016.
ASIAN OUTLOOK SUBDUED
But if the longer term outlook is strong for Asian base oils demand, the Asian lubricant market is likely to remain weak this year amid a looming recession in the debt-laden eurozone and a slow recovery in the US economy, analysts and market players say. However, they see little risk of a severe slump. The medium term outlook for the industry in Asia also remains relatively healthy.
Phadke expects the Asian lubricant sector to continue expanding in the next few years, albeit at a slower pace. He predicts the key markets of China and India will grow at a compound average annual rate of 6% and 4% respectively between 2010 and 2015, weaker than the 8.1%/year and 7.5%/year growth achieved in the five years ended 2010.
The growth rate for Asia as a whole is likely to moderate to 4-5%/year from 6%/year during 2005-2010, he says.
Phadke outlines several challenges facing the Asian economies that, although still growing, are now much weaker than they were before the global economic recession of 2008-2009. China, he argues, is trying to rebalance its economy by cutting its reliance on exports and increasing domestic consumption. This transition, he says, will be difficult in the near term.
High inflation is another hurdle confronting the world's second-largest economy as well as India, he says. The central banks in the two countries have made several rounds of interest rate hikes and put tighter restrictions on bank lending since 2010 in an effort to tame rising prices.
Chinese finished lubricant makers say the tight credit conditions, coupled with the lower European demand, have badly hurt their customers in the manufacturing sector. "Many of the small- and medium-sized factories in the Pearl River Delta region were cash strapped. Orders were also down," says a blender based in South China.
In India, lubricant suppliers grappled with weaker automotive sales amid higher borrowing costs, says Phadke. Floods in Thailand and the earthquake in Japan last year have also adversely affected the supply chain of OEMs, he adds.
Although the regional market is moving into a period of slower growth, participants said Asia will continue to drive global lubricant demand. "The fundamentals for growth in Asia still exists. The Asian market should continue [to show] strong growth as these temporary issues are sorted out," notes Phadke. A regional refiner is also cautiously optimistic about the resilience of the Asian market, where the economic conditions have remained fairly buoyant: "The US is probably going to see low growth next year, while Europe will likely go into a recession. But in Asia, the economies are still expected to show relatively healthy growth."
CHINESE LUBRICANT DEMAND SLIDES
The lubricant market in China, however, was less resilient than thought last year. The Chinese apparent lubricant consumption in 2011 is likely to have contracted by 3.4% year on year to 8.43m tonnes as a result of weak demand from the manufacturing and automotive sectors, it states in C1 Energy's report. The fall is in sharp contrast to the robust 13.7% growth in 2010.
The automotive sector, which accounts for about 40% of total demand, expanded at a slower pace last year after Beijing rolled back a two-year package of stimulus measures. In addition, industrial lubricant sales were dampened by a slowdown in the manufacturing industry amid a credit crunch that affected mainly smaller companies and as a deteriorating global economic backdrop undermined the demand for Chinese goods. Higher lubricant prices, which mainly reflected the rising costs of feedstock base oils in the first half of 2011, further encouraged buyers to delay purchases or turn to lower quality products. The slowdown in lubricant demand also reflected a high comparative base in 2010. "The [lubricant demand] figures for 2011 are not that surprising, considering that the market had an exceptionally strong year in 2010 when car sales soared because of tax breaks and rebates," a base oil trader says. China's base oil consumption last year fell alongside the decline in lubricant demand. The apparent base oil demand was at an estimated 7.38m tonnes, down by 3.5% from 2010, C1 Energy's report states.
Chinese blenders said the outlook remains uncertain this year as troubles in Europe are likely to continue to clip the growth momentum this year. Most of them expect the recovery in downstream demand to be tepid during this year's March-May oil change season.
"We think that our annual production targets may have to be pushed to the second half of the year," says a blender.
They hope China's easing inflation rate, which fell to a 15-month low in December, will give the government the flexibility to relax its current tight monetary stance and point its policy towards boosting growth.
AUTOMOTIVE MARKET COOLS AFTER RECORD SALES
China's automotive sector expanded at a much slower pace last year after its government removed the incentives that had boosted annual sales to a record high in 2010. Sales of passenger cars in the world's largest automotive market grew by close to 5.2% in 2011 to 14.47m units - far slower than the 33% increase in 2010, according to data from China Association of Automobile Manufacturers.
The market cooled considerably last year after the government withdrew incentives, including subsidies for consumers in rural areas and tax incentives for small cars, says Jenny Gu, an analyst for international automotive consultancy LMC Automotive.
"The incentives in 2009 and 2010 had encouraged consumers who were planning to buy cars to bring forward their purchases," she explains.
Several industry players say they are not discouraged by the weaker growth figures, which have come on the heels of an exceptionally strong year in 2010. "That kind of growth rate in 2010 is not sustainable. It is artificially driven by tax incentives. The market is now returning to a more normal, sustainable pace of growth," points out a lubricant distributor.
Gu expects sales of passenger cars, which exclude light commercial vehicles such as mini-buses, to grow at a fairly steady pace this year despite the global economic uncertainty. "The buying power of Chinese consumers is growing," she says, adding that the country's economic growth is still robust compared with the advanced economies.
A Southeast Asia-based engine oil producer is similarly upbeat on the passenger car segment. "There is a sizeable and fast-growing middle class who have rising disposable income - and they aspire to own cars."
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